The Apex Court In The Case Ofjoint Commercialtax Officer v. Young Men’s Indian Association [Air-1970 Sc 1212], While Considering The Case Of A Club, Supplyingvarious Refreshments Prepared In The Club To Its Members,Wheth

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 26 DAY OF FEBRUARY 2010 | PRESENT THE HON’BLE MR.JUSTICE JAYANT PATEL| AND THE HON'BLE MRS.JUSTICE S. SUJATHA. ITA Nos.279 & 280/2010C/WITA No.1/3/2009 BEIWEEN® M/S. KORAMANGALA CLUBCA 1/, 6 CROSS, 6 BLOCKKORAMANGALA, BANGALORE-560 034REPRESENTED BY ITSHON BLE SECRETARY.MR.C RAJENDRA _AGED ABOUT 58 YEARS.S/O MR.CHINAPPA REDDY(IN ITA 279 & 280/2010)MR.G.RAM PRASADAGED ABOUT 42 YEARS.SON OF MR.G.VEERARAGHAVAIAH.(IN ITA 173/2009) | APPELLANT (COMMON IN BOTH THE CASES) (BY SMT.JINITA CHATTERJEE, ADV FOR-MR.S PARTHASARATHI, ADV) AND= THE INCOME-TAX OFFICER|WARD-7(3), KENDRIYA SADANKORAMANGALA|BANGALORE-560 034. | .. RESPONDENT (COMMON IN BOTH THE CASES) (BY SRIYUTHS: E I SANMATHI ANDK V ARAVIND, ADVS) ITA Nos.2/79 & 280/2010 ARE FILED UNDER SECTION260-A OF INCOME TAX ACT 1961, PRAYING TO SET ASIDE THE.OREDER PASSED BY THE ITAT BANGALORE IN ITA Nos.1030 &.1031/BANG/2009 DATED 01.04.2010, IN THE INTEREST OF)JUSTICE AND EQUITY. ITA NO.173/2009 IS FILED UNDER SECTION 260-A OFINCOME TAX ACT 1961, PRAYING TO SET ASIDE THE ORDER.PASSED BY THE ITAT BANGALORE IN ITA NO.391/BANG/2008,DATED 127.172.7008 CONFIRM THE ORDERS OF THE APPELLATCOMMISSIONER AND ITAT, BANGALORE. THESE APPEALS HAVING BEEN HEARD AND RESERVEDFOR JUDGMENT ON 22 FEBRUARY 2016, COMING ON FORPRONOUNCEMENT OF JUDGMENT THIS DAY, S.SUJATHA J.,|DELIVERED THE FOLLOWING: COMMON JUDGMENT Tnese appeals under Section 260-A of the Income-tax Act| 1961, (hereinafter referred to as ‘the Act’ for short) are by the| assessee against the orders passed by the Tribunal, BengaluruBencn. 2.Tne following substantial question of law arises for| adjudication before this court: “I.Whether the finding of tne’Income-tax Appellate Tribunal noldingthat the provisions of Section 44AB ofthe income Tax Act, are applicable tothe appellant Club, whicn is a mutualconcern, is perverse and arbitrary andcontrary to law? — 2.|WhetherInthefactsandcircumstances of the case, the orderDasSsedDytheTribunalIMposingpenalty on the appellant under Section2/1B of the Income Tax Act, is’perverse and arbitrary naving regard totheexplanation|offeredDytheassessee?.” ‘3.Tne appeliant-Club is a registered society, the| objectives of which, are aS under: 7To promote sports of all kinds and|description. ?.Todil Falrliteraryandcultural activitiesincludingconcertsand.otherentertainments 3.To establish and maintain a library|and reading room. 4.To provide indoor and outdoor games|and amusements. 5,To conduct Exhibition, Excursions,|Publication of Magazines, etc., 6.To give’ scholarships, Free ships,Prizes and Monetary assistance to poor’students to help them in their studies and torender financial assistance to run free.libraries and free reading rooms. /.To contribute donations to social|service organizationsandforSOCIO-economic activity. 5.Ana generally to do all sucn otner|lawful things as are incidental, conducive, or|may be necessary in the interest of thesociety and to promote physical, moral and|intellectual aqevelopment and_ social ancultural welfare of the Members and their.families. 9,To promote and encourage fellowsnip|ana spirit de’cors” amongst the Members|and their families. ” 4Tne appellant nad failed to obtain the audit report|under Section 44AB of the Act, for which proceedings underSection 2/71B of tne Act were initiated py the assessing officerwhile concluding the assessments for the relevant assessment. /.To contribute donations to social|service organizationsandforSOCIO-economic activity. 5.Ana generally to do all sucn otner|lawful things as are incidental, conducive, or|may be necessary in the interest of thesociety and to promote physical, moral and|intellectual aqevelopment and_ social ancultural welfare of the Members and their.families. 9,To promote and encourage fellowsnip|ana spirit de’cors” amongst the Members|and their families. ” 4Tne appellant nad failed to obtain the audit report|under Section 44AB of the Act, for which proceedings underSection 2/71B of tne Act were initiated py the assessing officerwhile concluding the assessments for the relevant assessment. years. The appellant offered an explanation that the appellant-club was the mutual concern and was supplying the liquor andbeverages only to its members and there was no business.carried on py the appellant and accordingly, it was under thebonafide belief that the provisions of Section 44AB of the Act.were not applicable to it. Consequently, the appellant did notobtain the audit report at the time of filing of the return ofincome. The assessing Officer rejected the explanation offered.by tne appellant and levied the penalty. Aggrieved by tne.penalty order, the appellant preferred appeals before theAppellate Commissioner, wno had upheld the levy of penalty. |On further appeal before the ITAT Bangalore by the appellant,tne Tribunal dismissed the appeals confirming the levy ofpenalty. Aggrieved by the said order of the ITAT Bangalore,the appellant is before this Court. | 5.We have heard Smt.Jinitha Cnatterjee, learned|counsel appearing for Sri. S.Partnasarathi for the appeliant-assessee and Sri. E.I.Sanmathi along with K.V.Aravind for therespondent-revenue and perused the material on record. 6.The Apex Court in the case ofJOINT COMMERCIALTAX OFFICER vs. YOUNG MEN’S INDIAN ASSOCIATION , While considering the case of a club, supplyingvarious refreshments prepared in the club to its members,whether involves a transaction of sale or not has held as under: “Tne essential question, in the present.case, is whnetner tne supply of tnevarious preparations by eacn club to itsmembers [nvolved a transaction of salewithin the meaning of the sale of goodsAct 19350. Tne Sate Legisiature beingcompetent to legislate only under Entry54, List II of the 7[th]Scnedule to the.Constitution the expression “sale ofgoods’ bears the same meaning whicnit has in the aforesaid Act. Thus inspite of the definition contained inSection 2(n) read with Explanation I ofthe Act if there Is no transfer ofproperty from one to another there isno sale whicn would be exigible to tax. |If the club even though a distinct legalentity is only acting as an agent for itsmembers in the matter of, supply ofvarious preparations to them no salewouldbeInvolved(1)1/1968]DPS.C.R.421. (2) [1924] 1K.B.390. asthe element of transfer would becompletely absent. This position nasbeen rightly accepted even in tneprevious decision of this Court.” J.This Court in the case of CANARA BANK GOLDENJUBILEE STAFF WELFARE FUND - vs. DEPUTY COMMISSIONEROF [INCOME TA~ reported in |(2009) 308 ITR 202], whileconsidering the general law relating to mutual concerns, nas neld at paras 13 and 14 as under: “13. Under the general law relating to’mutual concerns, the surplus accruing to amutual concern cannot be regarded as income,profits or gains for the purpose of the Act (s.4),and where the contributors are to receive Dack apart of their own contributions, the completeidentity between the contributors and recipientsnegatives the idea of any profit, for no man canmake profit out of himself. Therefore, a mutualconcern can carry on an activity with itsmembers, though the surplus arising from sucnactivity is not taxable income or profit. Theprinciple of mutuality has also been accepted inthe case of a voluntary organization, wnhicnreceives contributions from its members, neld at paras 13 and 14 as under: “13. Under the general law relating to’mutual concerns, the surplus accruing to amutual concern cannot be regarded as income,profits or gains for the purpose of the Act (s.4),and where the contributors are to receive Dack apart of their own contributions, the completeidentity between the contributors and recipientsnegatives the idea of any profit, for no man canmake profit out of himself. Therefore, a mutualconcern can carry on an activity with itsmembers, though the surplus arising from sucnactivity is not taxable income or profit. Theprinciple of mutuality has also been accepted inthe case of a voluntary organization, wnhicnreceives contributions from its members, 14. Thus, the crucial test of mutuality isthat all the contributors to the common fundmust be entitled to participate in the surplus andtnat all the participators in the surplus must becontributors to the common fund. In otherwords, there must be complete identity betweentne contributors and the participators. If tnisrequirement is. satisfied tne particular formwhich the association takes Is |[mmeteria/. Conversely, where tnere is no sucn_ identitybetween the class of contriputors to the commonfund and the class of participators in the surplus, theprofitsOf|theassociationwould|beassessable to tax.” 8.The Tribunal in the case ofM/S. CENTURY CLUB INITA NO.205-207/BANG/2006, DATED 28.07.2006nas held tnat|the provisions of Section 44AB of the Act had no application tothe club and furtner held that even assuming the provisions.were applicable, the appellant’s bonafide belief that it did notrequired to get the accounts audited under section 44AB of theAct amounted to a reasonable cause for cancellation ofpenalty. QO.Indeed,tnese|judgments|referredTO above,supports the contention of the assessee that Section 44AB of.the Act is not applicable to the facts of the present case. 10.However, witnout entering into tne issue of|applicability of Section 44AB of the Act, if we examine as towhetner tne assessee nad the ponafide belief which constitutedreasonable cause to absolve him from the levy of penalty, it isclear from Section 273(B) of the Act that no penalty snail beleviable to a person or on assessee for any failure referred to. under the provision of Section 271B of the Act, if, it is proved.tnat there was reasonable cause for sucn faijure. | 11.|At this juncture, it would be beneficial to extractpara 19 of the judgment of this Court in tne case ot ASSISTANT|COMMISSIONER OF INCOME TAX AND ANOTHER VS DR KSATISH SHETTY [(2009) 310 ITR 0366],which reads as under: “19, The Tribunal nas also placed)reliance on yet another Judgment of the|Supreme Court Hindustan Stee/i Ltd. _ VsState of Orissa( 1972) 83 ITR 26 (SC), whereit deait with the provisions contained in the|Orissa Sales-tax Act. While considering the|general principles the apex Court has held|that penaity can be levied on failure of tne|assessee to get itself registered as a dealer|under the Sales-tax Act only when it Is|establisned that he had not acted bona fide,or acted deliberately in defiance of law or wasguilty of conduct contumacious, or dishonest,or in conscious disregard of his obligations.lf the assessee was Under a bone fide belief|that it was not a dealer, them tevying of|penalty could not be justified. In view of theforegoing discussions, it is clear to us that theasessee had acted in bona fide belief and hadno dishonest intention in not obtaining audit|report for ail the three businesses carried onby nim”, 17).It is also relevant to extract para 7 and 8 of thejuagment of Gujarat Hign Court in the case of|INCOME TAX.OFFICE VS SACHINAM TRUST [(2010) 320 ITR 0445] 17).It is also relevant to extract para 7 and 8 of thejuagment of Gujarat Hign Court in the case of|INCOME TAX.OFFICE VS SACHINAM TRUST [(2010) 320 ITR 0445] anIn tne circumstances, without enteringinto the analysis of provisions” of Section44AB of the Act, for the purpose of determiningwhether in the case of money lender, turnover|would constitute the basis for invoking the said|provision or gross receipts would constitute thebasis for applying the said provision, the appealis decided on the ground as to whether theadSSCSSCEhada|bone|fidebeliefWAHICcconstituted reasonable cause in the facts and|circumstances of the case. Under the provisionsof Section 2/3B of the Act, legislature hasprovidedthatnotwithstandinganything»contained in the provisions of Section 271B ofthe Act, no penalty snall be imposable on aperson or an assessee for any failure referredto in the said provisions if it is proved thatthere was reasonable cause for the said fai/ure. 8.Therefore, without entering into the|larger issue as to wnether there was, or wasnot, any failure, it is apparent that theassessee can be said to nave been preventedby reasonable cause on the basis of a legalopinion published, which was produced beforethe first appellate autnority. In fact, on areading of provisions of Section 44AB of theAct, it is a moot question as to which of thethree pnrases can be said to be applicable in agiven case, and the same would depend onfacts of each case and no. straight jacket formula can be evolved jin this’ contextAccordingly, the assessee was entitied tocontend thnat wnen tne terms furnover andgross receipts are separated by tne use of wordor, the assessee would be entitled to bonafidelybelieve tnat gross receipts would constitute thebasis for ascertaining tne limit of Rs.40 lakns—So aS to attract Section 44AB of the Act.” 13.Tne explanation of bonafide belief offered by the|appellant would constitute a reasonable cause to absolve theappellant from tne imposition of penalty under Section 271(B).if, examined in the light of the judgments ofSatnisn Shetty |Supra|andSachinamTrust|Supra], coupledwitnunderstanding of the issue relating to Section 44AB of the Act.in the light of the judgment of the Apex Court in.Young men's| Associationcase |supra] vis-a-vis Section 2(13) read witnSection 44AB of the Act, it could be safely held that theassessee nad acted under a Dponafide belief and tnere wasreasonable cause in not obtaining audit report. — 14.Tnus, it is clear that the assessee was under tne)bonafide belief that the provisions of Section 44AB of the Actwere not applicable to a Club, while supplying beverages, liquor etc., to its members as it was not engaged in any business, Dutonly a mutuality. Tne authorities and the Tribunal failed toappreciate the vital aspect of the explanation offered by theappellant in a right perspective and as such, in our consideredopinion, the order passed by the Tribunal confirming the orderof penalty is unsustainable. 15.For.the.foregoingFeaSoOns,We|anSWET|the.substantial questions of law raised in these appeals in favour ofthe assessee and against the revenue. The impugned orders ofthe Tribunal and of lower authority imposing penalty are setaside. Appeals are allowed accordingly. — *pgn/-| Sd/-. JUDGE| Sd/-| JUDGE|